Microsoft ( MSFT ) announced plans to buy Skype for around $8.5 billion. In a conference call this morning, Skype and Microsoft laid out their visions of the union including Steve Ballmer's take on how well Skype could integrate with Outlook, Xbox and Windows mobile OS. Ballmer likes that "Skyping" is synonymous with Internet calling, and with Skype, Microsoft can make enterprise products more collaborative as well as support its gaming and mobile initiatives to better compete with its peers like Cisco ( CSCO ), Google ( GOOG ), Apple ( AAPL ) and others.
Skype could be good fit for Microsoft
We believe Microsoft could integrate Skype's voice, video and sharing technology with some Microsoft Office as a way for businesses to better collaborate and use Microsoft products via the Internet. Office is an important business for Microsoft and accounts for around 35% of our estimate for Microsoft stock. These features could give Microsoft better pricing power in selling its licenses to enterprises.
Skype has about 663 million registered users, and Microsoft could leverage such a large user base to promote its search advertising business through Bing. Although Bing's market share is still small compared to Google's, the large Skype's user base could help Bing gain market share at a rapid pace.
Finally, Microsoft could integrate the Skype calling service into its own operating system Windows Phone 7. Although Skype is already integrated with iPhone and Android OS, Microsoft could look to incorporate Skype into its mobile offering. Microsoft is desperately looking to increase its presence in the smartphone OS market, in which it continues to lose market share. According to a recent Comscore report, Microsoft's U.S. smartphone subscriber market share declined from 8.4% in December 2010 to 7.5% in March 2011.
Our price estimate for Microsoft stands at $29.62 , which is a premium of roughly 25% to the market price.